Sunday, March 22, 2015

ZIRP Until It Hurts

The Market Trend Model (http://bitly.com/M_Trend_Model) moved to a positive bias this week as stocks rocketed higher when the Federal Open Market Committee announced ZIRP (zero interest rate policy) is alive and well, regardless of FOMC statement language nuances.  In what can be characterized as a Federal Reserve policy of  calm anxiety, Janet Yellen proclaimed, "Just because we removed the word 'patient' doesn't mean we're going to be impatient."

The FOMC also lowered its U.S. economic forecast due to a variety of factors including the strong U.S. dollar, commodity deflation, and a slowing global economy (http://ow.ly/KE9Zl).  As I wrote on Wednesday afternoon, "with the Federal Reserve deathly afraid of raising interest rates while the economy is expanding, does anyone believe Janet Yellen will raise interest rates if the economy slows as forecast? So while the Federal Reserve claims transparency, it appears to me Janet Yellen has succeeded only in becoming more opaque."

It remains to be seen how the stock market will move should a significant  U.S. economic slowdown occur while the Federal Reserve maintains its zero interest rate policy.  Peter Boockvar, chief market strategist at Lindsey Group, summed it up best, "The difference this time versus the last couple of years when you had QE (quantitative easing) and zero interest rates, you also had strong earnings...now you have no QE. You have zero interest rates, but you no longer have strong earnings growth."

At the moment, and for the foreseeable future, it appears the Federal Reserve is willing to ZIRP until it hurts.